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Everyone loves a bargain. Whether they're at the grocery store, the local flea market or at the neighborhood car dealership, people inherently understand the benefits of great deals.
Yet despite this infatuation with bargain opportunities, it doesn't occur to many investors that buying cheap stocks is possibly the best way to squeeze a whole lot of bang out of a hard-earned buck. As legendary investor Christopher H. Browne writes in "The Little Book of Value Investing," we should always attempt to "buy stocks like steaks . . . on sale."
With the help of our community over at MSN CAPS, I've tried once again to find some cheap stocks for all of my kindred stingy spirits.
We ran a simple screen for five-star stocks -- the highest rating a stock can get in CAPS -- with EV-to-EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization) multiples below 10. We used this metric, rather than the more common price-earnings ratio, to account for differences in each company's capital structure. This screen helps us zero in on statistically cheap stocks that, according to our CAPS community, have plenty of great reasons to trade at much higher levels.
As usual, our list isn't exactly brimming with exciting or familiar names. But that should be just fine with us. As sharp Fools know, boring stories often translate into the market's biggest returns.
| Company | Industry | EV-to-EBITDA* |
|---|---|---|
Industrial equipment | 9 | |
Natural-gas utilities | 7.8 | |
Restaurants | 7.4 | |
Oil and gas drilling | 6.8 | |
Aerospace and defense | 6.2 | |
Oil and gas drilling | 3.6 | |
Steel and iron | 3.3 |
* Enterprise value to earnings before interest, taxes, depreciation and amortization
It doesn't take a genius to soundly thump the market. Sometimes, it's as simple as finding a stable, century-old dividend distributor to invest (and reinvest) in. With 44 All-Star supporters (and no such detractors) in our CAPS community, Oneok (OKE, news, msgs), a diversified energy company that recently celebrated its 100th anniversary, may be one such solid stock for the long run.
Over the past few years, Oneok has been an income investor's dream. In fact, it got the nod from the Motley Fool Income Investor service in its December 2005 issue.
After a relatively constant payout throughout the 1990s, Oneok's dividend has doubled since 2003. It's no wonder that the stock has delivered an average annual return of roughly 30% over the same period. Of course, that's all in the past. Whether Oneok investors today can replicate or even approach those returns is another story.
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Firing on all cylinders
Despite Oneok's bargain-bin ratio, a 53% run-up over the past year has the stock currently yielding 2.8%, its lowest yield in decades. Of course, that generally happens when your business is firing on all cylinders.In Oneok's case, the distribution segment grew operating income more than 30%, while its energy-services segment increased operating income approximately 29% in the first quarter. I'm always a bit wary about jumping into a business (and a stock) that's so red hot. But for Fools unafraid of a little positive momentum, there are plenty of reasons to like Oneok, even at these levels.
Most obvious, CEO John Gibson has repeatedly asserted that the stock remains undervalued. Oneok's strong cash flow has allowed management to buy back 15 million shares in the past two years, with an additional 7.5 million-share repurchase currently being authorized.
In addition, a solid financial position enables the company to fuel the growth of its 45.7%-owned business, Oneok Partners, a master limited partnership expected to undertake $1.5 billion in capital projects over the next few years. With further dividend increases, buybacks and growth coming from Oneok Partners, this 100-year-old geezer might actually keep outrunning Mr. Market.
Stock Charts (Year)
Oneok
CAPS player 50day, meanwhile, gets straight to the point: "Founded in 1906. What I picture is a bunch of old school business men that don't monkey around with the company's or the stockholders' money. No fat stock options deals, no cooking of the books, and no bull. All business. Plus, we're paid a nice dividend to hold the stock."
Finally, CAPS All-Star LurkyLurky leaves us with a simple strategy: "Great company with steady stock appreciation that's been raising its dividend for years. I would like to buy this on a dip."
This article was reported and written by Brian D. Pacampara for The Motley Fool. At the time of publication, he owned no position in any of the stocks mentioned.
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